COVID-19 INSURANCE TEST CASE - ARE YOU COVERED?
Given the unprecedented interruptions on businesses as a result of the COVID-19 pandemic, the Australian insurance sector has been reported as potentially losing as much as $1 billion if policyholders seek to rely on business interruption (BI) insurance policies.
UK Test Case
The issue is of course not confined to Australia and, recently in the UK, the Financial Conduct Authority (FCA) brought a test case “in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market”. As a result of the COVID-19 pandemic and the enforced lockdowns, policyholders whose businesses were affected by the COVID-19 pandemic suffered significant losses, resulting in large numbers of claims under BI policies. Although most BI policies for small to medium sized businesses are focussed on property damage, some policies cover for BI for other causes including disruptions as a result of infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). The FCA brought a test case as a result of insurers disputing liability leading to widespread concerns.
In September 2020, the UK High Court’s decision in The Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors [2020] EWHC 2448 considered the FCA’s test case, which tested 21 different policy wordings issued by eight insurance companies. In its lengthy and complex judgment, the Court found that BI insurance policies should be paid out on losses caused by the COVID-19 shutdowns (though subject to the limits of the policy).
Australian Test Case
ASIC’s Advice
In Australia, the Australian Securities and Investments Commission (ASIC) recently issued advice on handling business interruption claims in light of the test case initiated by ASIC and the Insurance Council of Australia (ICA). In a letter to insurers, brokers, and Lloyd’s coverholders, ASIC confirmed that it has been working with the ICA, the Australian Prudential Regulation Authority (APRA), and the Australian Financial Complaints Authority (AFCA) to monitor a test case and other issues relating to BI insurance:
“We are monitoring the development and progress of the proceedings filed on 13 August 2020 in the Supreme Court of New South Wales, now being decided by the NSW Court of Appeal. This case will determine the effectiveness of certain infectious disease exclusions found in many Australian business interruption insurance policies. We refer to this as the ‘Australian test case’. “
The test case concerns 392 policy wordings issued by general insurers to Australian small businesses that ASIC has collected and reviewed. ASIC noted that:
“While a considerable number of these policy wordings contain exclusions for losses arising from pandemics, including exclusions that are subject to the Australian test case, we identified a range of policy wordings that may respond to losses arising from COVID-19.
This includes cover under so-called ‘infectious disease’, ‘prevention of access’ or ‘closure by authority’ coverage clauses. How the individual policies respond will, of course, depend on the relevant facts of each claim and the particular policy wording.”
ASIC has also stated that in light of the test case and its analysis of BI insurance policies, it recommended that general insurers, Lloyd’s coverholders and, where appropriate, brokers, should take the following approach when handling claims brought by Australian small businesses relating to BI:
Steps should be taken to ensure that any information provided to policyholders about policy coverage before claims are lodged is clear, accurate, balanced and does not, whether deliberately or inadvertently, mislead or deceive.
Claims relating to policies which do not contain a pandemic exclusion or limited exclusion should be assessed and, where appropriate, paid in a timely manner to ensure that financial pressures on small businesses are not exacerbated by slow payments.
For policies with a pandemic exclusion that refers to either the Quarantine Act 1908 (Cth) (repealed) or the current Biosecurity Act 2015 (Cth), general insurers and Lloyd’s coverholders should have a plan for responding to the outcome of the test case as these exclusions are being considered and analysed.
On 16 November 2020, the NSW Court of Appeal in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 held that exclusion clauses in the BI policies were invalid because it had not referred to the correct and current legislation. The decision may be appealed as the Insurance Council of Australia is presently considering the judgment.
In the test case, the exclusion clause in the BI policy had mistakenly referred to “quarantinable disease” as defined and legislated by the Quarantine Act 1908 (Cth). That legislation had, however, been repealed in 2015 and replaced with the Biosecurity Act 2015 (Cth) which did not incorporate any concept of “quarantinable disease”. Despite that error, insurers (including IAG, Suncorp and QBE) argued that the reference to the repealed legislation was an error and the intention of the policy was to exclude a pandemic under any future legislation, as evinced by the words "and subsequent amendments". The judges of the Court of Appeal disagree and held that the reference to “subsequent amendments” could only be read to relate to the Quarantine Act only because (at [44]):
“First and foremost, the expression “and subsequent amendments” is not ambiguous and only describes amendments to the Quarantine Act. The repeal and replacement of that legislation with other legislation is not within the ordinary meaning of those words. Secondly, the word “subsequent” is not redundant. It makes clear that there may be amendments to the Quarantine Act within the policy period. Thirdly, even if “subsequent amendments” is redundant because the reference to the Quarantine Act is to be understood as being to that Act as originally enacted, the presumption against that word being treated as mere surplusage, and of no effect, is not a strong one (see Big River Timbers Pty Ltd v Stewart [1999] NSWCA 34 at [16]); and in any event, that presumption does not justify giving “amendments” a meaning which it does not reasonably bear, namely as encompassing changes that amount to a repeal and replacement of the Quarantine Act with legislation that has the same substantive purpose and function.”
In other words, the Court took a narrow and orthodox approach to construction and found that principles of contractual construction are not so flexible as to permit “declared to be a quarantinable disease under the Quarantine Act” to be read as “determined to be a listed human disease under the Biosecurity Act”.
What this means for you?
The UK test case and the test case heard by the NSW Court of Appeal demonstrates that financial and insurance authorities and regulators have a desire to ensure that small to medium policyholders are properly protected in making any claim under BI insurance policies. The results of the Australian test case is important in setting precedent and, more importantly, potentially ensuring the survival of businesses moving forward. Without their claims being accepted, it is very likely that many Australian small businesses will find it difficult to continue in 2021 – especially in circumstances where any further lockdowns are required.
Given that the lockdown rules in Melbourne have slowly eased, now is a good time to consider whether your business is in a position to make a claim under its insurance policies for BI loss as a result of the lockdowns that have already taken place this year.